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Navigating the Legal Aspects of Mergers and Acquisitions
Mergers and acquisitions are among the most complex actions businesses undertake. Blending brands, processes, and ...
Mergers and acquisitions are among the most complex actions businesses undertake. Blending brands, processes, and culture takes time and requires careful planning. The legal aspects of mergers and acquisitions are also critical to success. One misstep could invalidate the deal, invite formal investigations, or lead to heavy fines. Thankfully, businesses can take several steps to steer clear of trouble and protect their interests.
Due Diligence With the Legal Aspects of Mergers and Acquisitions
Due diligence is the comprehensive investigation and business appraisal completed by prospective buyers. Ideally, buyers or merging companies do this with professional assistance. The main point of legal due diligence is to identify and mitigate risks that could lead to litigation in the future.
Experts can assist with the following financial and legal considerations:
- Estimate the value of assets and liabilities.
- Review financial records, such as general ledgers, and determine accuracy.
- Assess potential risks, such as ongoing lawsuits or regulatory compliance issues.
- Review intellectual property rights and licensing agreements.
Due diligence paints a clear picture of the target company's legal status. Knowing this upfront makes it easier to create effective contingencies and become one of the successful mergers and acquisitions examples.
Regulatory Considerations and Requirements in M&A Transactions
Virtually every business has a few highly regulated departments. These include human resources, finance, and payroll. Some businesses also operate in highly regulated industries, such as healthcare or insurance. Consequently, all companies must review the regulations affecting their business operations in four main areas.
1. Antitrust and Competition Laws
These laws ensure free and fair markets. Consumers and small businesses benefit the most from these considerations and legal aspects of mergers and acquisitions. It ensures consumers have choices and small businesses have a fair chance at success. There are several practices generally prohibited by these laws:
- Cartels and Price Fixing: In this context, cartels are groups of companies that collude to set pricing methods, prices or output levels. This can lead to inflation and reduce consumer options.
- Destroying Competition: Companies use several methods, but a common example is when a company acquires its competitor in order to shut down operations.
- Monopolistic Conduct: A firm with substantial market power abuses that power to exclude competitors, inflate prices, or degrade product quality.
- Unfair Competitive Practices: This covers various forms of malpractices, such as false advertising, bid rigging, or bribery.
- Deceptive Business Practices: This includes false advertising or misrepresenting products/services. Medicine and law mergers must pay close attention to these because they face special advertising restrictions.
2. Security Laws
Security laws ensure transparency and fairness for investors, consumers, and other affected entities. They set standards that organizations dealing in securities must follow to remain compliant. Compliance with these legal aspects of mergers and acquisitions may involve disclosing essential details about the transaction to shareholders and the public.
Failure to comply could lead to investigations, bans, fines, and M&A blocks. The laws also protect investors and consumers from unethical practices, such as failing to disclose the true risk level of specific investments.
3. Tax Laws and Regulations
Mergers and acquisitions can affect tax brackets and the regulations that apply to certain levels of revenue. Business owners must consider this when considering the M&A deal structure. They must also review tax laws and regulations that might affect one company but not the other because of size, industry, or organization type.
4. Labor and Employment Laws
Labor and employment laws can affect plans for restructuring or layoffs post-M&A. These laws protect employees' rights and dictate the terms for redundancies, severance packages, and employee transfers.
The size of the new organization can also lead to it meeting the threshold for specific employment regulations. In contrast, the separate companies might not have previously met this threshold. For example, the federal minimum wage applies to companies with at least $500,000 in gross sales.
Post-Merger Integration and Compliance
Even after closing the deal, complexities related to the legal aspects of mergers and acquisitions can continue to emerge. The merged or acquired entities may need to comply with new regulations, especially if they operate in a new jurisdiction or industry. Integrating policies, procedures, and cultures can also lead to legal issues, particularly around employment and contracts. Compliance is an ongoing need, so legal complexities can arise at any time. Also, laws or regulations change.
Workers may need retraining to account for the new legal framework they operate under. Contract revisions are also commonplace, as new legal entities replace the old ones. Finally, compliance with data privacy and security regulations may require additional resources or investments.
The Role of Information Technology in Compliance
When companies blend IT infrastructures, or one onboards the other onto its network, IT professionals must prepare for the changes. M&As often prompt the need for additional resources and new configurations. Migrating to the cloud or sharing cloud resources improves collaboration, especially if one or both companies have workers in different locations.
Technology continually transforms the way people live, work, and conduct business. It also controls the flow of data and the ways unauthorized persons can access it. Organizations must take proactive action to secure that data and ensure consumer privacy. This is one of the top reasons IT compliance falls under the legal aspects of mergers and acquisitions. There are many IT compliance issues to keep in mind when merging or acquiring.
Data privacy laws vary across jurisdictions, but the general premise is the same. These regulations set ground rules that protect consumer privacy. Organizations must comply with these regulations or face hefty fines and public scandals. Here are some of the provisions organizations can encounter in the GDPR, CCPA, and others like them:
- Obtaining explicit consent from individuals for data processing, storage, and sharing
- Implementing safeguards to protect data
- Promptly notifying authorities and affected individuals in the event of a data breach
- Respecting the right to be forgotten
Data privacy extends to employees as well and is one of the critical legal aspects of mergers and acquisitions. For example, companies must carefully handle HR data, such as salaries, performance evaluations, and health benefits, to avoid violating payroll and employment laws. Managers should also regularly audit their data processing activities to comply with evolving privacy laws.
Some organizations must archive data as part of transparency and recordkeeping requirements. For example, financial institutions must retain messages per regulatory mandates to comply with financial regulations. Organizations must also archive emails, voicemails, and chats for several reasons:
- Resolving disputes
- Monitoring customer service activity and quality
- Tracking customer journeys
- Compliance with laws such as the Sarbanes-Oxley Act or Securities and Exchange Act
This is the electronic discovery of relevant information as part of a legal investigation or audit. It presents several challenges, including the sheer volume and various formats that data can come in. Some organizations invest in tools to automate eDiscovery compliance tasks such as record search, retrieval, and archiving. These are critical tools for handling risks related to legal aspects of mergers and acquisitions that might later arise.
Data management involves the use of software, tools, and best practices to organize and maintain data throughout its lifecycle. The goal is to make information accessible, secure, and available for analysis. Organizations may also need to migrate data onto a new platform post-merger or acquisition. Complying with data management regulations protects data integrity and defends against security breaches.
Ransomware, zero-day breaches, and other security incidents are on the rise. On average, they cost companies millions of dollars, and no business is too small or trivial to target. Hackers know that data is most at risk during transit and systems are most at risk during significant business changes. This makes mergers and acquisitions a precarious process.
Organizations must take extra security precautions at this time, including these standard measures:
- Encryption: Encryption protects data from unauthorized access. If a laptop is lost or stolen, encryption ensures its data remains secure. End-to-end encryption can also protect connections and data in transit, such as when migrating data to the cloud.
- Access Controls: Access control systems limit who can enter physical locations and which employees can access specific digital assets. Companies must consider whether their compliance requires two-factor authentication for sensitive data.
- Data Loss Prevention Tools: DLP tools prevent sensitive information from leaving the organization in unauthorized ways.
- Virtual Private Networks: A VPN ensures secure connections between remote workers and company servers, cloud environments, or applications. Companies should consider introducing or expanding their VPN use as part of merging with another entity.
- Cybersecurity Training: Even with all the latest technology, employee actions can compromise security. Cybersecurity training can help employees identify and respond to potential threats, reducing the risk of a data breach.
IT and Legal Aspects of Mergers and Acquisitions
Our team at Cloudficient works closely with companies during the mergers and acquisitions process. We can help you decide what kind of system will work best for your needs and create a strategy ensuring a seamless transition. Our experienced professionals can also suggest productivity and collaborative tools that assist with integration.
Are you ready to see how we handle the IT and legal aspects of mergers and acquisitions your company takes on? Contact us to schedule a consultation or get a quote.
With unmatched next generation migration technology, Cloudficient is revolutionizing the way businesses retire legacy systems and transform their organization into the cloud. Our business constantly remains focused on client needs and creating product offerings that match them. We provide affordable services that are scalable, fast and seamless.